France

   

Economic Policies

#23
Key Findings
Marked by ambitious reforms and persistent protest, France falls into the middle ranks internationally (rank 23) in terms of economic policies. Its score in this area has improved by 0.7 points relative to 2014.

President Macron’s administration has pursued an ambitious set of economic reforms, aimed at creating jobs and improving competitiveness while boosting workers incomes. Tax cuts, greater labor-market flexibility and financing aids have improved business investment. Economic growth has been positive but remains somewhat anemic.

The Yellow Vest protests have slowed or postponed some reforms, with the government’s resulting in extra social spending. Unemployment rates are falling, but remain very high, especially among youth. The government rejected a set of unemployment-insurance solutions negotiated by employers and unions, and introduced its own sweeping changes reducing benefits.

Many individual and company taxes have been raised, but the overall tax ratio has remained relatively constant due to social contributions. Taxes and social contributions are in sum very high. Efforts to slow public spending growth have been fiercely criticized by opponents. Commitments to reduce the budget deficit to below 3% have proved difficult to meet.

Economy

#19

How successful has economic policy been in providing a reliable economic framework and in fostering international competitiveness?

10
 9

Economic policy fully succeeds in providing a coherent set-up of different institutional spheres and regimes, thus stabilizing the economic environment. It largely contributes to the objectives of fostering a country’s competitive capabilities and attractiveness as an economic location.
 8
 7
 6


Economic policy largely provides a reliable economic environment and supports the objectives of fostering a country’s competitive capabilities and attractiveness as an economic location.
 5
 4
 3


Economic policy somewhat contributes to providing a reliable economic environment and helps to a certain degree in fostering a country’s competitive capabilities and attractiveness as an economic location.
 2
 1

Economic policy mainly acts in discretionary ways essentially destabilizing the economic environment. There is little coordination in the set-up of economic policy institutions. Economic policy generally fails in fostering a country’s competitive capabilities and attractiveness as an economic location.
Economic Policy
7
France’s economic outlook is improving. Since President Macron’s election in May 2017, he and his administration have launched an ambitious reform agenda. Over the past two years, an impressive set of reforms (probably comparable in magnitude only to the 1958 – 1959 reforms undertaken at the beginning of the Fifth Republic) have been adopted or launched. However, the Yellow Vest protests lasting from November 2018 through spring 2019 served to slow some reforms slightly, and forced the government to postpone green taxes on oil, abolish taxes and social contributions levied on overtime hours, and increase transfers to single parents and workers with low salaries or pensions. The overall costs of these measures, due both to lower fiscal receipts and higher expenses, has been estimated at €17 billion.

The 2020 draft budget proposes additional changes, such as a decrease in company taxes, an elimination of the local residence taxes (taxe d’habitation) for 80% of taxpayers (with a complete elimination by 2022), a substantial cut in social-system contributions paid by employees, and a total €5 billion decrease in the income taxes paid by low-income families. The overall objectives are to increase the net incomes of low-income employees and workers, prevent capital flight and increase incentives for investors. The crucial feature is the consistency of the overall package, which favors the creation of jobs, erases some defects of the current unemployment-benefit system, and bolsters company competitiveness while slightly increasing workers’ incomes due to the reduction in social-system levies or contributions.

In the short run, the economic situation has remained relatively positive, although economic growth rates forecast for 2019 and 2020 have respectively been reduced to 1.4% and 1.3%. Business investment has been boosted by Macron’s business-tax cuts, favorable financing conditions and increases in labor-market flexibility. Meanwhile, lower labor taxes and improved job training opportunities have helped boost job creation, although the high unemployment rate is declining slowly. The public deficit remains at its past level (98.8% of GNP), and is expected to decline by only 1% over the 2017 – 2022 period. While reductions in the overall budget deficit were originally planned, this will be actually higher (3.1% of GNP) in 2019 than in 2018, and the public deficit target set for 2020 (2.2%) may not be met. The deficit forecast for 2021 has been increased from 1.2% to 1.5%. The Social Security budget, which was supposed to be positively balanced in 2019, will in fact see a €4 billion deficit that is expected to be erased only by 2023. The financial consequences of Macron’s social measures, announced on 10 December 2018 in order to calm the social unrest, have had both positive and negative effects. On the one hand, growth has been sustained due to the stimulus effect of spending measures; on the other, this has compromised efforts to balance the budget and reduce the public debt. However, given the situation at the time, there was probably no other politically acceptable alternative.

Citations:
OECD Economic Surveys, France, April 2019
https://www.oecd.org/economy/surveys/France-2019-OECD-economic-survey-overview.pdf

Labor Markets

#29

How effectively does labor market policy address unemployment?

10
 9

Successful strategies ensure unemployment is not a serious threat.
 8
 7
 6


Labor market policies have been more or less successful.
 5
 4
 3


Strategies against unemployment have shown little or no significant success.
 2
 1

Labor market policies have been unsuccessful and rather effected a rise in unemployment.
Labor Market Policy
7
Between 2012 and 2016, absolute unemployment figures increased by 500,000 people. Since that time, the unemployment rate has decreased slowly, from 9.9% in the first quarter of 2016 to 9.1% in the second quarter of 2018, and further down to 8.5% during the second quarter of 2019. The employment rate of workers over 55 years of age is still among the OECD’s lowest. France also has a notoriously high youth-unemployment rate. According to a report released in 2017 by the National Accounting Office, the labor-market policy measures put in place to support young people were costly (€10.5 billion annually), inefficient (most young people do not find a job at the end of their publicly funded training program) and incoherent (there are too many unattractive and poorly managed programs). Most young people were hired on short-time contracts, with two-thirds of the contracts holding a duration of less than one month. The Macron government has decided to eliminate cosmetic measures adopted in order to lower unemployment rates artificially, such as subsidized jobs for young people, and instead place a special focus on training and employability. Paradoxically, there are numerous unfilled job vacancies across various sectors of the economy. More and more unskilled jobs, particularly in the construction and agricultural sectors, are being filled by non-EU migrants or workers from Eastern and Central Europe recruited on temporary contracts.

During his presidential campaign, Macron announced an intention to substantially reform the labor-law code by using ordinances (drafted and adopted by the executive alone). The ordinances are characterized by multiple adjustments rather than the adoption of a brand new grand design. They introduce more flexibility, simplify rules, merge diverse internal bodies involving social partners at the company level, and give greater space to regulations at the company level compared to the sectoral level in order to allow more flexibility especially for small- and medium-sized companies. These highly controversial measures, fiercely opposed by some trade unions, are already producing positive effects by lowering the number of legal cases related to the firing of employees (the law has fixed standard rates of financial compensation), although some courts are resisting application of the reform by invoking international treaties. The government has also launched immediate measures to improve the job qualifications of long-term unemployed and young people who left school without a diploma, a program involving €15 billion over five years. Furthermore, a reform of the job training system was adopted in 2018, which will upgrade apprenticeship schemes which suffer from a poor reputation. The number of apprentice contracts substantially increased in 2018 – 2019.
During the summer of 2018, negotiations began on a reform of the unemployment insurance scheme, with plans to adopt the reform in 2019. In May 2019, however, the government rejected the solutions negotiated between trade unions and business organizations. Instead, it introduced a set of more sweeping measures aimed at restricting unemployment benefits and reducing the program’s huge deficit. A system of bonuses and penalties has also been introduced with the aim of reducing the number of very short-term contracts (which allows employers and employees to exploit insurance-system loopholes).

Taxes

#21

How effective is a country’s tax policy in realizing goals of revenue generation, equity, growth promotion and ecological sustainability?

10
 9

Taxation policy fully achieves the objectives.
 8
 7
 6


Taxation policy largely achieves the objectives.
 5
 4
 3


Taxation policy partially achieves the objectives.
 2
 1

Taxation policy does not achieve the objectives at all.
Tax Policy
7
Taxes and social contributions are in sum higher in France than almost anywhere else in the OECD (45.2% of GDP in 2017, 44.3% expected in 2020). This is a consequence of extraordinarily generous political and budgetary commitments that have led to a continuous rise in taxes. Nonetheless, tax revenues do not cover expenses, as public spending is exceptionally high by Western standards. The Macron administration has started to reverse the trend, but the process has been rather slow. Public expenditure has dropped from 55% of GDP in 2017 to an expected 53.8% in 2019, and is forecast to be 53.4% in 2020.

Whereas the lowering or elimination of many charges and taxes has improved companies’ competitiveness, the overall tax ratio has remained at a high level similar to that of previous years. The effect on economic growth was felt during the first half of 2018, with a decline in consumption (a major factor driving economic growth in France) prompting the inclusion of further consumption and corporate-investment incentives in the draft 2019 budget (e.g., an elimination of social-welfare contributions on any hours worked beyond 35 per week). However, the tax burden is viewed as penalizing the lower-middle working classes, which led to the Yellow Vest movement in November 2018.

The tax policy initiated by Macron has sought to exert better control of the main drivers of public spending. One tactic, for example, was to sign “contracts” with key local government authorities aimed at slowing the expansion of local expenses, reducing tax exemptions (which have a total estimated cost of €100 billion per year, according to the Ministry of Finance), cutting social expenses and streamlining funding for social housing. This overall policy attracted fierce criticism from opposition parties and the media, and Macron was depicted as favoring the wealthy at the expense of the poor. The low flat tax rate for income on capital and particularly the partial abolition of the wealth tax were perceived as symbolic of Macron’s role as a “president of the rich.” In fact, the criticism proved off base, as the new taxation system will increase public revenue due to a better evaluation of taxable wealth. However, in order to calm the social revolt, Macron’s government was forced to substantially revise its tax policy, reducing taxes and social-system contributions for lower income groups.

The ecological sustainability of taxation also has to be rethought, since the tax increases on fossil-fuel-based energy served as the trigger of the uprising in November 2018. These taxes have been put on hold, with no substitute in sight as of the end of the review period.

Budgets

#38

To what extent does budgetary policy realize the goal of fiscal sustainability?

10
 9

Budgetary policy is fiscally sustainable.
 8
 7
 6


Budgetary policy achieves most standards of fiscal sustainability.
 5
 4
 3


Budgetary policy achieves some standards of fiscal sustainability.
 2
 1

Budgetary policy is fiscally unsustainable.
Budgetary Policy
5
France’s budgetary situation is still unsatisfactory with regard to European commitments and long-term sustainability. Over recent years, many new commitments (public servants’ salary increases, security and military expenses, disputable rescue operations) have further increased public spending in spite of public declarations. For example, the number of civil servants was supposed to be decreased by 150,000 during the five-year presidential term; however, the total number has barely shifted, with only 50 civil service posts due to be eliminated in 2020.

After his election, Macron and his government decided to stick to EU budgetary-consolidation obligations, and make sure that France respected its commitments in 2017 and the following years. The president’s aim was not only to return to a position of sound public finances and regain financial maneuvering room, but also to recover lost credibility in Europe, a precondition for any ambitious proposal to reform the European Union or to influence the European Union’s policy agenda.

However, Macron’s hopes that economic growth would support his strategy have been disappointed. The economic growth forecast had to be lowered further in 2019 and in the 2020 draft budget (to 1.3%) Furthermore, the cost of the “urgency measures” announced on 10 December 2018 in response to the Yellow Vests’ social protests created still another impediment to a balanced budget. Given that very few sustainable economies have been realized and the reform of the administration is stagnating, the structural budgetary deficit will see little diminution, and the budget deficit will exceed the 3% limit of the European Stability and Growth Pact (with a deficit 3.1% forecast).

Research, Innovation and Infrastructure

#11

To what extent does research and innovation policy support technological innovations that foster the creation and introduction of new products?

10
 9

Research and innovation policy effectively supports innovations that foster the creation of new products and enhance productivity.
 8
 7
 6


Research and innovation policy largely supports innovations that foster the creation of new products and enhance productivity.
 5
 4
 3


Research and innovation policy partly supports innovations that foster the creation of new products and enhance productivity.
 2
 1

Research and innovation policy has largely failed to support innovations that foster the creation of new products and enhance productivity.
R&I Policy
8
Having improved since 2007, France performs well in research and development policy. According to the EU Innovation Scoreboard 2019, France is ranked 11 out of 28 EU member states with respect to innovation capacity. In the report’s global innovation index, France performs slightly above the EU average and is ranked in the group of “strong innovators,” behind the group of “innovation leaders.” Overall spending on research and development constitutes 2.19% of GDP (2017), a slight decline since 2015 after a period of increase. R&I spending is still below the OECD average, and far from the EU target of 3%. Whereas public spending is comparable to the best-performing countries, private spending remains less strong. France’s main relative weaknesses are its low private investment, and limited broadband penetration, intellectual assets and employment in fast-growing enterprises.

On the positive side, the measures taken by the Hollande administration have encouraged the creation of new technology-based start-up firms. President Macron declared that he would “make France a start-up nation,” and his government has adopted further legal and fiscal policy measures intended to facilitate the creation and growth of startups. For example, he created a €5 billion development fund earmarked for startups that had passed through initial stages of growth. The government’s objective is boost the capitalization of these new companies, thus avoiding the twin risks of expatriation or absorption by more powerful foreign companies. The government has also resisted the suggestion of reducing the tax exemption offered to companies that improve their research capacities in spite of its increasingly high costs to the state budget. Presently, France has become Europe’s second-largest tech market by dollar funding, outpacing Germany and falling just behind the United Kingdom.

However, barriers to innovation still exist. Cooperation between academic institutions and businesses is still restricted by cultural traditions, such as a lack of investment by small and medium-sized companies and the reluctance of researchers to invest in policy-relevant or applied research. Productivity levels and public research could also be improved. However, the development of public-private initiatives as well as the launching of incubators by private investors are improving the quantity and quality of initiatives and investments, in particular in new technologies.

Citations:
European Innovation Scoreboard 2019
(https://ec.europa.eu/growth/industry/innovation/facts-figures/scoreboards_en)

Global Financial System

#14

To what extent does the government actively contribute to the effective regulation and supervision of the international financial architecture?

10
 9

The government (pro-)actively promotes the regulation and supervision of financial markets. It demonstrates initiative and responsibility in such endeavors and often acts as an international agenda-setter.
 8
 7
 6


The government contributes to improving the regulation and supervision of financial markets. In some cases, it demonstrates initiative and responsibility in such endeavors.
 5
 4
 3


The government rarely contributes to improving the regulation and supervision of financial markets. It seldom demonstrates initiative or responsibility in such endeavors.
 2
 1

The government does not contribute to improving the regulation and supervision of financial markets.
Stabilizing Global Financial System
8
French governments of either political complexion have generally been in favor of regulation and control of the global financial system. They have been active internationally and at the EU level in supporting better international banking regulations. They have been strongly supportive of all initiatives contributing to the re-capitalization of banks, to the better control of speculative funds and to the fight against fiscal evasion and tax havens. They also have been active, together with 10 other EU member governments, in proposing to impose a levy on financial transactions (the so-called Tobin tax). They have also pushed for the creation of a banking supervision mechanism at the EU level. The Hollande and Macron governments have been or are committed to improving fiscal cooperation on information exchange, the fight against tax havens and tax evasion. In 2016, the French parliament adopted a better system of controls and penalization to tackle corruption at the international level (“Loi Sapin 2”), and Macron has actively pushed at the EU level for higher and fairer taxation of multinational companies working in the information technology sector (the so-called GAFA tax, named after Google, Apple, Facebook and Amazon). Following the failure of this initiative, the French parliament adopted its own levy applicable to the large companies, which in turn triggered a fierce response from the Trump administration. During the Biarritz G-7 summit, France said it would abolish this tax once an agreement had been reached at the OECD level.
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